Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, ITT Inc. (NYSE:ITT) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does ITT Carry?
You can click the graphic below for the historical numbers, but it shows that as of October 2021 ITT had US$209.9m of debt, an increase on US$132.2m, over one year. However, its balance sheet shows it holds US$585.8m in cash, so it actually has US$375.9m net cash.
How Strong Is ITT's Balance Sheet?
According to the last reported balance sheet, ITT had liabilities of US$899.2m due within 12 months, and liabilities of US$410.0m due beyond 12 months. Offsetting these obligations, it had cash of US$585.8m as well as receivables valued at US$577.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$145.6m.
Having regard to ITT's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$8.59b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, ITT boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, ITT's EBIT dived 10%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine ITT's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. ITT may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, ITT recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
We could understand if investors are concerned about ITT's liabilities, but we can be reassured by the fact it has has net cash of US$375.9m. So we are not troubled with ITT's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that ITT is showing 2 warning signs in our investment analysis , you should know about...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.